In challenging the tax overhaul that President Donald Trump signed in December, a lawsuit filed by New Jersey calculated how much more residents will pay in federal income tax because of the new $10,000 cap on the deduction for state and local taxes, known as SALT.

That total cost: $3.1 billion. A year.

“What the Trump Administration enacted with the SALT deduction cap was nothing more than a tax hike on our working and middle-class families and seniors,” Gov. Phil Murphy said in announcing the lawsuit.

But data contained in the lawsuit tells a different story. If New Jersey wins, 60 percent of the tax benefits – almost $1.9 billion – would go the richest 1.5 percent of state residents, those who make more than $500,000.

The 280 families with incomes over $10 million would get $118 million, or 4 percent of the total.

To be sure, taxpayers who are not in the top 1.5 percent will benefit if the state wins. Just not as much as those in more rarified brackets.

The SALT cap will cost families earning between $50,000 and $100,000, who make up 22 percent of all tax filers, an extra $82 each on average, or $80 million combined. Another 18 percent of taxpayers who make $100,000 to $250,000 would pay an extra $848 apiece, a combined federal tax increase of $698 million.

This data is in the lawsuit as part of a declaration from Martin Poethke, director of the state Office of Revenue and Economic Analysis. He said he based his estimates on 2015 tax return data, the most recent full year available.

Overall, his data show that the 95 percent of families earning $250,000 or less would get less than 25 percent of the benefit if the state's lawsuit prevails.

Yet these are the families state officials focus on when criticizing the new tax law.

"If you look at the average property tax bill in a number of counties, you can live in a middle class home and have high property taxes," said Catherine Brennan, the deputy state treasurer.

'Stick it to the Northeast'

So why would a liberal governor like Murphy, who campaigned on a promise to increase taxes on millionaires to make them "pay their fair share," pursue a lawsuit where the benefits were weighted toward that same group?

One reason may be that even people who are hit with an average $82 tax increase by Trump's law resent it, and don't care if making it go away means someone else, like the group making $5 million to $10 million, gets to save an average $168,000.

Another reason for the suit is anger that New Jersey and a handful of other heavily Democratic states were targeted for punishment by Congress. The state is suing along with New York, Connecticut and Maryland, all of which have high local taxes and will be disproportionately affected by the SALT cap.

Rep. Josh Gottheimer, D-Wyckoff, said one Republican colleague told him he was happy on the day of a key vote on the tax plan because, "Today we get to officially stick it to the Northeast."

Republicans in Congress who wrote the tax law mostly come from states with lower state and local taxes. Even though most of their states get more back from Washington than they pay in federal tax, and New Jersey and the other plaintiff states get back less than they pay, supporters of the SALT cap argued that the SALT deduction forced low-tax states to subsidize high-tax states.

Tax writers also had to trim some deductions to keep the cost of their tax bill below the $1.5 trillion cost over 10 years set in the 2018 budget resolution. According to the Joint Committee on Taxation, changes to itemized deductions, including the SALT cap, increased tax collections by $668 million, money that was applied to tax cuts elsewhere.

It should be noted that the data in the state lawsuit only shows the difference between the law Trump signed and what tax burdens would be if that same law did not have a SALT cap. It's possible — indeed several studies say it's likely — that people in each of the income brackets cited will actually pay less tax under the law, even with the SALT cap.

Rep. Josh Gottheimer, D-Wyckoff, announces a plan at a Jan. 5, 2018 news conference to combat the cap on deducting property taxes included in a new federal tax law.
Viorel Florescu/NorthJersey.com

But studies show that while every state had more winners than losers, there were more losers in states with high local taxes such as New Jersey. Among New Jersey taxpayers making $79,890 to $142,390, for example, ITEP estimated that 17 percent would face a tax increase next year. Only 5 percent of a similar group in Texas faced a tax increase.

Court hurdles ahead

Just having a grievance with the way Congress treated the state is not enough to overturn a federal tax law, however.

“The case has a very strong likelihood of not succeeding,” said Reuben G. Muller, a tax attorney at ColeSchotz in Hackensack. “A party can’t sue the U.S. government generally unless the government allows it to. It’s called federal sovereign immunity."

Muller also said states may have a problem showing they were the injured party, since the cap on the deduction hits individuals and not the state itself.

The states argue their sovereign power to tax their residents is harmed. Poethke's declaration also noted that because the SALT cap will drive down property values, the state will collect $105 million less over the next two years from the state tax on the value of real estate sales.

The states also say the ability to deduct most state and local taxes has been part of the federal code since the income tax was first enacted, and was understood to be part of the deal when states ratified the constitutional amendment allowing for a federal income tax.

But Adam S. Fayne, a former lawyer for the IRS now with Saul Ewing Arnstein & Lehr in Chicago, said states did not raise constitutional challenges to the Alternative Minimum Tax, which reduces the value of deductions such as SALT when they exceed a certain threshold.

Fayne also said the argument of being treated unfairly relative to other states has weaknesses.

“There are high earners who pay high income taxes in red states, and it’s not as though somebody who lives in a conservative state isn’t also going to be limited,” he said.

“States have often brought constitutional challenges to the federal government’s authority to tax. They consistently lose those cases," Fayne said.